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IHP 620 Short Paper.doc - IHP 620: Economic Principles of...

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IHP 620: Economic Principles of HealthcareModule One: Short PaperPriscilla McDannisDr. Toni Clayton
Short PaperEconomics comes with some key principle of competition or choice. Choice is a risktakes because with every choice made in healthcare, there is a cost to it, which can be beneficialor costly through analysis of it always. Competition on the other hand, allows buyers to competeamong each other. In this, profit is the incentive and major regulator of the market. We will alsolook at market concentration, which is a player in economic principles, this is the “extent ordegree to which a relatively small number of firms account for a relatively large percentage ofthe market,” (BusinessDictionary, 2017).Market concentration is measured by the use of theHerfindahl-Hirschman Index (HHI), which can identify how close a market is to being amonopoly.It is used by the U.S. Department of Justice in order to evaluate potential mergerissues.Market concentration is calculated by the HHI by “squaring the market share of eachfirm competing in a market, and then summing the resulting numbers,” (Investopedia, 2017).The score of it can range from zero to 10,000, with zero indicating perfect competition and10,000 indicating a monopoly (Investopedia, 2017).Market power can be defined “extent to which a firm can influence the price of an itemby exercising control over its demand, supply, or both. Under the economic concept of perfectcompetition, all firms in a market are assumed to have zero market power. Thus, each firm has toaccept the current market price without being able to exercise any control over it. In the realworld however, in every market, some firms have varying levels of market power with highly

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